• Klaus Meitinger

Buy signal in the private-wealth stock market indicator.

Dear readers,

ifo Uhr Dec2019The Ifo business climate continued to rise in December. Of particular interest here is the development of business expectations in industry, which we regard as an indicator of sentiment for the global economy and the stock markets. This expectation component has just delivered a buy signal.

In October, expectations in the top echelons of industry had improved for the first time after a long period of decline. This was followed by a further slight increase in November and now the third consecutive increase in December. The ifo economic clock still positions the German economy in the downturn quadrant. But the trend is now pointing upwards again. And the ifo traffic light switches to "green" (graphs below).

Three consecutive increases in the expectation components of the ifo survey had very often signalled a trend reversal in the economy and stock markets in the past. The private wealth stock market indicator therefore increases the investment ratio.

As you know, we do not use the stock market indicator, Trendwenden to make exact forecasts on the stock markets. Our aim is to find out when the relationship between opportunity and risk in equity investments changes. The basic logic is: Wenn shares are low valued and the economic trend is improving, the probability is high that the stock market will develop positively in the long term. On the other hand, if equities are expensive and economic expectations are deteriorating, it is time to become more cautious.

ifo Ampel Dec2019This was exactly what had happened in February 2018. According to our calculations, the German share index DAX was slightly overvalued at the time, while the MDAX was very clearly overvalued. At the same time, economic indicators deteriorated significantly and business expectations in the top echelons of German industry fell for the third time in succession. With such a data situation, a new, negative trend in the economy has (almost) always established itself in the past. After all, those who are at the helm know best where the wind is blowing from.

The private-wealth stock market model reacted to this combination of high valuation and a trend reversal in the economy with a sell signal at a DAX level of around 12500 points. Being highly invested in equities had become too risky, and since then, the private-wealth stock market indicator has suggested a minimum weighting of equities of 0 - 30 percent of the individual's intended equity exposure.

In fact, the German economy has weakened significantly since February 2018. Currently, the German economy is even flirting with recession. So the ifo indicator has predicted the economic development quite well. Prices on the stock market then also fell sharply in 2018. What was unusual, however, was that - unlike in previous cycles - the indices did not lose value as the economic downturn continued in 2019. On the contrary: prices recovered and the DAX is now even around five percent higher than in February 2018,

One explanation for this is the turnaround by the central banks in January 2019, and since monetary policy has returned to full throttle, the trend towards a dichotomy on the stock market has become even more pronounced. During the negative interest rate era, the price-earnings ratios of non-cyclical companies with stable earnings and dividend growth increased dramatically. At the same time, cyclical stocks lost a massive amount of value. In many cases, prices there are now more than 50 percent below the level of February 2018, which means that cyclical stocks reacted exactly as the indicator suggested. Only the massive revaluation of so-called quality stocks prevented the DAX from falling.

Following the three-fold increase in business expectations in German industry, the economic component of the stock market indicator is now switching back to green.

However, the valuation component remains in yellow. According to our calculations, the fair value of the DAX currently lies between 12000 and 12500 points. The German market barometer is therefore slightly overvalued. However, the MDAX, the market for small caps, still holds around 170 percent of its fair value.

Overall, this constellation only permits an increase in the share quota to 30 - 70 percent of the individually planned share quota.

For short-term positioning on the stock market within this range, we use the results of the capital market seismograph. as you know, the capital market seismograph distinguishes between three phases: "green" (calm market = buy), "yellow" (turbulent market with positive expectation = invest, but with hedging) and "red" (turbulent market with negative expectation = do not invest).

In recent months, the sum of the "good" probabilities has risen significantly and has now been above 90 percent for some time. Since the end of September, the seismograph has therefore already been proposing to increase the weighting significantly again.

Currently, the probability of a calm, positive stock market is 68 percent. The probability for a turbulent, volatile market with a positive trend ("yellow") remains at 23 percent. The probability of negative turbulence is now only 9 percent. "We rate the current data on the economy and business activity as neutral (in the USA and Europe) to good. The increase in Chinese industrial production is particularly positive. And now that phase one of the trade agreement between the USA and China seems to have been concluded, there is no contradiction between the positive outlook that can be seen from the seismograph and the general political development. "Our seismograph continues to suggest a maximum weighting of the equity quota," explains Oliver Schlick, who regularly calculates the seismograph.

Conclusion:

The private wealth stock market indicator had been out of the stock market since the end of February 2018. The three-fold increase in business expectations in the industrial sector now suggests a turnaround in the economy and especially in cyclical stocks. The ratio of opportunity to risk has thus improved significantly. This makes it possible to increase the weighting of shares to 30-70 percent of the individually planned share proportion. As the capital seismograph is currently providing very positive data, the private-wealth stock market indicator suggests a current equity weighting at the upper end of this range.

Your

Klaus Meitinger

Note: Despite careful selection of the sources, no liability can be assumed for the accuracy of the content. The information provided in private wealth is for informational purposes only and does not constitute an invitation to buy or sell securities.

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